hi everybody Jacob Reed here from review econ.com today we're going to look at all of the microeconomics graphs that you need to know for your AP economics exam or final exam if after watching this video you still feel like you need a little help head over to review econ.com and pick up the total review booklet yes practice sets a practice exam it has answers and explanations it has a graph cheat sheet a formulas cheat sheet plus exclusive online practice games if you want to pick up yourself a copy head down to the links Below in the description now let's get on to the microeconomics graphs first thing we're going to do is go over the production possibilities curve and the basics of supply and demand if you already took macroeconomics you can go ahead and Skip those otherwise let's get into it the first graph we're going to look at is the production possibilities curve the production possibilities curve is a graph that shows all possible combinations of production for two different Goods or categories of goods that an economy can produce here we're going to draw a graph or an economy that can produce both robots and corn if they produce only robots and no corn they would have a point of production about right there if they produced only corn and no robots they'd have a point of production right there we could also have many points in between showing all the different combinations of corn and robots this economy could produce connect those dots and it gives us our production possibilities curve that curve there shows the maximum levels of production between the two different Goods that this economy could produce instead of specific Goods you could actually see this graph with categories of goods like capital goods and consumer goods or guns and butter when you see a bowed out curve that is concave to the origin that will be an indication of increasing opportunity because as this economy produces more and more corn the opportunity costs in terms of robot production increases as more corn is produced we see that increasing opportunity costs as we move down that curve increasing our production of corn the opportunity cost of robots get bigger and bigger and bigger as we move down that curve the reason for this increasing opportunity cost is due to imperfectly adaptable resources the resources that are good at producing robots are not going to be equally good at producing corn and vice versa if you see a linear curve that is a straight line production possibilities curve that will be an indication of constant opportunity costs here we have cakes and cookies as we increase our production of cakes here the opportunity costs in terms of cookies is constant as more and more cake is produced the reason for constant opportunity costs is because the resources used for these two goods will be perfectly adaptable that means that the resources used to produce cake will be equally adaptable to the production of cookies and vice versa when you see a level of production that is on that action possibilities curve that is an efficient level of production in macroeconomics we would call that long run equilibrium it means that all resources are being used to their maximum potential if you see levels of production that are within the production possibilities curve that is an indication of inefficient use of resources some resources are sitting idle and not being used to their maximum potential in macroeconomics we see that as a recessionary gap with lots of workers who are unemployed points outside the curve are impossible because of scarcity we do not have the resources to produce an unlimited amount of corn and robots at the same time with comparative advantage specialization and trade it is possible for economies to consume outside their production possibilities curve but not produce a outward shift of the production possibilities curve comes from an increase in the quality or quantity of resources with more land labor capital or entrepreneurship we will see an increase in the possible production of corn and robots in macroeconomics we call that economic growth it's an increase in the long run potential real GDP if there was a decrease in the quality or quantity of resources like from a natural disaster we would see that as a shift inward of the production possibilities curve it would no longer be possible to produce as much corn or robots in this economy if we saw a technology change that only impacted the production of one good in this example an increase in the technology for the production of corn we would see an outward shift of just the corn side of this production possibilities curve the production possibilities of robots wouldn't have changed but the possible production of corn would have increased the next graph we're going to look at is supply and demand we're going to look at each of those curves separately and then put them together first demand the law of demand tells us that consumers will buy more at low prices and less at higher prices that's ceteris paribus of course meaning other things don't change when we put that on the graph we see a downward sloping demand curve which shows the inverse relationship between price and quantity that means that when prices rise the quantity demanded will decrease and when prices fall the quantity demanded will increase remember price changes quantity demanded it does not change demand a change in demand is a shift of that demand curve if there is only a change in price we just move along that demand curve so what will shift the demand curve well we have some demand curve shifters that you need to know first of all we have consumer taste and preferences if something is popular it will increase demand if something's not popular it will decrease demand next is Market size that's the number of buyers available to purchase a product and increase in the number of buyers will increase the demand a decrease in the number of buyers will decrease the demand next we have prices of related goods for substitutes an increase in price will increase the demand for the other good substitutes are Goods that can be used interchangeably like honey and jam compliments on the other hand are Goods that go alongside each other like jam and peanut butter when the price of one good increases demand for the other one will decrease and vice versa when it comes to changes in income for normal goods and increase in income will increase the demand for the product like shoes and most other Goods inferior Goods like condensed soup will see an increase in income causing a decrease in the demand for the product and vice versa and the last one is expectations for the future sometimes guesses about the future will impact how much people buy today if you see an increase in demand for the product that is Illustrated as a rightward shift of that demand curve if there's a decrease in the demand for the product that will be a leftward shift so remember ride is an increase and left is a decrease next up we have Supply Setters paribus an increase in price will cause an increase in the quantity supplied and a decrease in price will cause a decrease in quantity supplied there's is a direct relationship between price and quantity supplied when we put it on the graph that's Illustrated as an upward sloping supply curve showing that direct relationship between price and quantity when the price is low we will have a low quantity and when the price increases we will see an increase in the quantity supplied likewise when there's a decrease in that price we will see a decrease in that quantity supplied and just like with demand price changes quantity supplied it does not change Supply there are of course other things besides price that can change Supply and that will be Illustrated as a shift of that supply curve what are those Supply shifters first of all we have input prices when there's an increase in the resource price used in the production of a product that will decrease Supply and vice versa when it comes to government tools taxes will decrease Supply subsidies will increase Supply and regulations generally will decrease Supply next we have the number of sellers more sellers will increase Supply and fewer sellers will decrease Supply changes in technology will generally increase Supply when it comes to the prices of other Goods producers who will decrease the supply of one good when the price of another good they can produce increases and just like with demand the expectations of the future can also impact the supply when we put it on the graph and show that increase in Supply just like with demand it's a right word shift it looks like a downward shift but that rightward shift is an increase in the quantity at every price along that supply curve and when we decrease Supply that's going to be shown as a leftward shift of that supply curve right is an increase and left is a decrease when we put those two curves on the same graph we get an intersection point where the two curves cross that's the equilibrium point it's the price we're quantity supplied equals quantity demanded now a market will seek that equilibrium price when prices are above equilibrium we will have a surplus the quantity supplied will be greater than the quantity demanded and that will push prices downward towards that equilibrium when prices are below equilibrium we will have a shortage and prices will eventually rise because quantity demanded will be greater than quantity supplied and that shortage will push the price up towards equal Librium now equilibrium is the price and quantity we will typically get within a market when there's an increase in demand we will see the equilibrium price increase and the equilibrium quantity also increase when there's a decrease in demand that will decrease the equilibrium price and decrease the equilibrium quantity increasing the supply will decrease the price and increase the quantity and decreasing the supply will increase the price and decrease the quantity and I'll suggest you memorize all those shifts I suggest when in doubt graph it out next we're going to look at some price controls that the government could impose on a market a price floor is a government regulation that establishes a minimum price for a product when a price floor is effective or binding it will be above equilibrium at that artificially higher price we will have a lower quantity demanded and a higher quantity supplied that difference between quantity supplied and quantity demanded is called a surplus but since suppliers can't sell more than consumers are willing to buy QD or the lowest of the two will be all that is exchanged within this Market the consumer surplus will be found at that price floor all the way up to the demand curve until we hit the quantity demanded the producer Surplus on the other hand will be from that price floor all the way down to the supply curve until you hit the quantity demanded and since we aren't reaching our allocatively efficient quantity at equilibrium we have some deadweight loss found by that triangle there you could calculate the areas of the consumer surplus producer Surplus and dead weight loss if there were numbers here another price regulation you could see is a price ceiling price ceilings are below equilibrium when they're binding or effective on the graph that means the price ceiling will go below that equilibrium price and at that artificially low price we will have a high quantity demanded and a low quantity supplied the difference between those two 2 here is called a shortage because the quantity demanded is greater than the quantity supplied we are going to run out of this product how much is going to be sold within this Market well it's still the lower of the two because we aren't going to be able to buy more than they are willing to supply so here Qs is the quantity that will be exchanged within this market and since the price ceiling is below equilibrium we're going to have a small amount of producer Surplus it's at that price ceiling drop down until you hit the supply curve there at the quantity you're producing and that will be our producer Surplus from that same price ceiling go all the way up until you hit the demand curve up to the quantity we're producing and that is our consumer surplus right there and again since we aren't producing the allocatively efficient quantity which is at equilibrium we have some deadweight loss found in that triangle there now another government regulation you could see within a market is excise taxes these are per unit taxes that are imposed on the producer of a product the per unit tax will shift the supply curve to the left the vertical distance of that tax giving us a new equilibrium there at the intersection between the supply Plus the tax and the demand curve that gives us a lower quantity with the tax QT here on that graph and it means that consumers will pay PB that's the buyer's price at the new equilibrium now since the producers are paying that tax to the government they will only receive PS that's the price the seller receives after the tax that box right there is the tax revenue it's the vertical distance of the tax times the quantity of the tax our producer Surplus is the price the seller receives dropping down to we hit the supply curve up to the quantity of the tax and the consumer surplus is the buyer's price all the way up to the demand curve till we get to the quantity of the tax and since we aren't reaching in the allocatively efficient equilibrium quantity we have some deadweight loss with that triangle there now we can look at this graph and determine who is paying the bulk of this tax if we divide the tax revenue box from that Old equilibrium the upper portion is the buyer's loss that's the amount of the tax that is being paid by the consumers it's PB minus p e that's the per unit amount times the quantity we get in this market with the tax and the lower portion of that box is the seller's loss it's p e minus PS times the quantity we get with the tax and here we have consumers paying a larger amount of the tax that's because the demand curve here is more inelastic because less elastic means more of the tax burden the sellers on the other hand are paying less of the tax and that's because the supply curve here is more elastic and as a result more elastic means less tax burden we can take the supply and demand graph and turn it into a international trade graph by changing the supply to a domestic Supply and the demand to a domestic demand in this model we're going to assume that the world price is below the equilibrium price and we can import as much as we want at that world price that gives us a horizontal World Supply at the world price below our equilibrium and because the world price is below our equilibrium consumers are going to demand a higher quantity than equilibrium Q2 here but domestic producers are only going to produce q1 right there the difference here will be imported and the producer Surplus we will see in this market is based on that world price because that is all domestic producers will receive and we take that world price and drop all the way down till we hit the supply curve up to the quantity that is domestically produced which is q1 and that is our triangle of producer Surplus the consumer surplus on the other hand is still at that world price but since consumers are not getting q1 but Q2 we're going to go all the way until we hit that Q U2 and go up till we hit the demand curve and that gives us a giant amount of consumer surplus as a result of international trade with a world price below equilibrium since the international world price being below equilibrium causes there to be a small amount of producer Surplus the producers of this product May Lobby Congress and the president to impose a tariff on this product that tariff would be a tax on foreign-made Imports if that happens we would see an upward shift of that world Supply it would be the world Supply Plus the Tariff that would cause an increase in the quantity that is domestically produced we'd be up to Q3 and there would be a decrease in the quantity that is domestically consumed down to Q4 the difference between Q3 and Q4 is imported so we are still importing but less than we would be prior to the Tariff as a result of that tariff the producer Surplus increases it's all the way up to that new world price plus the Tariff through the new domestically produced quantity of Q3 the consumer surplus is still larger than it would be if we didn't have international trade but it is lower than it was before we go all the way to that Q4 that's the domestic produce quantity from that world price plus the Tariff all the way up to the demand curve and that triangle there is the consumer surplus after the Tariff now the government gets to bring in some tariff Revenue which is tax revenue on Imports and it's on the amount that is imported it's Q4 minus Q3 that Gap times the amount of the Tariff which is the vertical distance between those world price and world price plus the Tariff curves and since we lost some consumer surplus as a result of this tariff we have two small triangles of deadweight loss right there next we're going to talk about cost curves first we have our total cost curves the top one there is the total cost those are all costs incurred for producing a product that middle one there is our variable cost those are the costs that change with the quantity produced and that horizontal one is our fixed cost that's the cost that doesn't change with the quantity produced that's why it's horizontal at every quantity and since variable cost plus fixed costs will equal our total cost the gap between the axis and that fixed cost Curve will always equal the gap between the total cost and variable cost curves and while your total cost curves are likely to show up on your exams average cost curves show up more often and here are our average cost curves that's our average total cost there and our average variable cost we also have our marginal cost curve there and that is the cost of producing the next unit of output both of those curves will be intersecting the marginal cost at their minimum points and the minimum of the average total cost curve is called productive of efficiency it means we are producing at the lowest average cost here that's q1 it's rare to see the average fixed costs on these graphs but you can find it just with the average total cost and average variable cost it's the gap between those two curves and since the fixed costs don't change with the quantity produced the average fixed cost will continually decrease as a result those two curves the average total cost and average variable cost get closer and closer together as more quantity is produced if there's a change in fixed costs for a firm that will shift the average total cost if there's a change in average variable cost it will shift the marginal cost average total cost and average variable cost in the short run we have both fixed costs and variable costs but in the long run all costs are variable as a result we could have a long run average total cost curve with three sections for most firms as they scale up production we will see a decreasing long run average total cost curve we call that decreasing average total costs economies of scale average costs are falling as quantities increase in the long run mathematically we call that increasing returns to scale doubling all inputs will more than double our output for many firms we will see a horizontal portion in the middle that means that as firms increase production the average costs are not changing we call that constant returns to scale mathematically it would mean we double the inputs and get exactly double output now eventually many firms will expand to the point where average total costs begin to rise we call that diseconomies of scale the long run average total cost curve is beginning to increase mathematically we double our inputs and get less than double output the next graph we're going to review is perfect competition now remember you already learned about a perfectly competitive market that's supply and demand but now we're going to look at the market along with the firm here the market determines the price that every firm gets to charge within this market and that's because perfectly competitive firms are price takers and have no impact on the price charged we're going to take that market price and bring it all the way to the firm graph and that becomes the firm's marginal revenue demand average revenue and price Mr darp as many of us like to call them next we're going to add in the marginal cost and find the profit maximizing quantity Where marginal revenue equals marginal cost drop down that gives us the quantity this profit maximizing firm will produce since we're trying to draw a perfectly competitive firm earning an economic profit here draw in that average total cost curve last the average total cost curve should be below the point where marginal revenue equals marginal cost draw in that average total cost curve and now we can find our profit box it's the Quan we're producing all the way up till you hit that average total cost curve keep going until you get the average revenue curve bring those two points over to the price axis for that firm and that gives you our profit box you could calculate the area of it if there were numbers and the reason we know this firm is earning an economic profit is because the average total cost is less than the price from the market if we wanted to draw a firm earning economic losses we would draw in that ATC above the Mr equals MC point right there and that firm would now be earning economic losses right there in that box the reason we know that this firm is earning economic losses at that profit maximizing quantity is because the average total cost is greater than the equilibrium price from the market now in the long run a perfectly competitive firm is going to earn zero economic profits that means they're going to be breaking even how do you draw that graph well you're simply going to make the average total cost tangent to that Mr equals MC point and there we call that long run equilibrium this firm is is earning zero economic profit and it's because the average total cost equals the price now breaking even is what's going to happen in the long run but how do we get there let's take a look at this firm that is earning economic profits and see how that firm gets from profit to long-running equilibrium first of all firms are going to seek that economic profit that will cause businesses and entrepreneurs to enter the market and compete when that occurs we're going to see a rightward shift of the supply curve because we have more producers selling this product that increase in the supply will drive down the equilibrium price in the market and as a result of that price falling in the market the firm's price Falls as well dropping our marginal revenue demand average revenue and price downward until it is now tangent to the minimum of the average total cost curve we have a lower profit maximizing quantity here of qf1 and the firm is now breaking even at the lower market price I'd also like to point out that the price from the market in order to get rid of the economic profit this firm had the price drops further than the bottom of that old profit box if it only went to the bottom of the profit box The Firm would be still earning Profit just less than it had before if on the other hand the firm is earning economic losses as we have here in this graph in the long run firms are going to exit the market and that will cause the supply curve to shift to the left when that occurs the price is going to rise in the market that new higher price from the market will translate to a new higher price and higher marginal revenue demand average revenue and price for this firm and now at the new higher profit maximizing quantity of qf1 there we are now breaking even because the price equals that minimum of the average total cost I'd also like to point out that the Lost box is still there and you'll notice that the new price doesn't quite go to the top of that old lost box it's still poking out there just a bit so when it comes to efficiency for a perfectly competitive market they are always going to be allocatively efficient because the price will always equal marginal cost and in the long run not in the short run in the long run they will be productively efficient which means they produce at the minimum of the average total cost that's when they're breaking even perfectly competitive firm's supply curve can be found on the marginal cost curve it's the marginal cost curve above the minimum of the average variable cost if the market price was p e right here then the firm would produce qf we're going to put a point right there at that price quantity combination that is part of the supply curve for this firm the price Rises and the quantity produced will increase and that gives us a new higher point on that marginal cost curve that is equal to this firm supply curve if on the other hand the price drops down to this new price there we get a new lower profit maximizing quantity that gives us a third point on this firm supply curve even though this firm is earning economic losses here it will still go ahead and produce because this box of economic loss is smaller than this box of total fixed cost and if they shut down they lose their total fixed cost so it pays here to lose less so anytime price is less than the average variable cost losses are going to be less than the fixed cost and it pays case to open if the price falls to the minimum of the average variable cost that is the shutdown point that is the lowest price at which this firm would ever willingly produce and so the firm supply curve is the marginal cost above the minimum of the average variable cost next we're going to look at a single price Monopoly graph since the market is the firm and the firm is the market we have a downward sloping demand curve which is the market demand curve and we have a marginal revenue curve below the demand that's because as this firm produces more units of output it must lower the price on all units produced because it's a single press Monopoly not a price discriminator and like all firms they will profit maximize where Mr equals MC find that quantity and drop down to the axis there is our profit maximizing quantity for this firm and since this is a monopoly they're not going to price that marginal cost they're going to price all the way up at that demand curve right there at PF and since I want to draw this firm earning economic profits I'm going to draw in that average total cost curve below that price point where it hits that demand curve at the quantity produced and the gap between that price point there on the demand curve down to that average total cost at the quantity we're producing that box gives us our profit and we know its profit because the average total cost is less than the demand curve there and that means economic profit if we want to draw a profit maximizing Monopoly that is breaking even we would still draw it in just like we did before but now we're going to have the average total cost tangent to the demand curve here at that price quantity point when you're drawing this graph it's important to note that the average total cost curve Cannot drop below the demand curve at any quantity if it does there are some quantities where the firm could have made a profit and since it's supposed to be profit maximizing where Mr equals MC it can't make a profit anywhere else breaking even is their best hope and the reason we know that this firm is breaking even is because the price is equal to the average total cost and that means zero economic profit if you want to draw this firm earning economic losses you're going to put the average total cost curve above the demand curve there and at the profit maximizing quantity of qf you go from that demand curve up till you hit the average total cost curve and out to the axis between those two two points and that gives you your economic loss box let's talk a little bit about efficiency here with monopolies now monopolies are not productively efficient because they don't produce at the minimum of the average total cost but since they produced that the downward sloping portion of the average total cost curve monopolies capture economies of scale some important areas you need to know on your Monopoly graph is the deadweight loss there in that triangle we also have our consumer surplus and that triangle up there and our producer Surplus there in that quadrilateral comparing a monopoly to a competitive market first you can draw a competitive market with supply and demand and find equilibrium and then to turn it into a monopoly simply realize that the supply is that marginal cost and that demand curve will have a marginal revenue below find that profit maximizing quantity Where Mr equals MC and we will find that the Monopoly produces less than the equilibrium quantity we would have in a competitive market they also price all the way up at that demand curve at the profit maximizing quantity which gives us a higher price than we would have in a competitive market so monopolies charge higher prices and produce lower quantities you could see a graph called a natural monopoly there are a few different ways to draw it but this one's my favorite but a natural monopoly has an average total cost curve that constantly downward slopes through all relevant quantities I like to draw mine with a horizontal marginal cost curve and an average total cost curve that never quite touches it as we can see here that this firm always captures economies of scale at any quantity it might produce and when it comes to Natural monopolies an unregulated natural monopoly is going to have a large amount of deadweight loss one way to limit that deadweight loss would be to impose an allocatively efficient socially optimal price if we put a price ceiling at po there we would have the quantity of qo that's the socially optimal quantity and there's no deadweight loss the problem here is that the firm is earning economic losses because at that price the average total cost is greater than the price in order to keep that firm from going out of business in the long run the government is going to have to give the firm a lump sum subsidy that is equal to its losses you can find that box right there calculate the area of it and that would tell you how much money the government would have to spend in order to keep this business from shutting down permanently the alternative to imposing the socially optimal price is to have a fair return price Fair return price means that the price is going to equal the average total cost that means the firm will be earning normal profits which means positive accounting profit but zero economic profit we see that fair return price where the average total cost intersects the demand curve there and while there's still some dead weight loss there's a lot less dead weight loss than there was when this Monopoly was unregulated you could also see a perfect price discriminating Monopoly if we see a perfect price discriminating Monopoly it will still have a downward sloping demand curve but marginal revenue and demand average revenue price Mr darp will all be one downward sloping curve this firm will produce where Mr equals MC and you'll notice that they are pricing at marginal cost which means that Perfect Price discriminators are allocatively efficient and there's no deadweight loss of course price discriminating monopolies are not popular among consumers and that's because they turn consumer surplus into economic profit found in that shape there now the single price Monopoly graph that you saw earlier in this video is also the same graph that you see for monopolistic competition difference here is the monopolistic competition breaks even in the long run so in the long run we're going to have Mr equals MC there's our profit maximizing quantity for this monopolistically competitive firm they price all the way up there at the demand curve just like a single price Monopoly but here our average total cost is going to be tangent to that point there on that demand curve because this firm breaks even in the long run in the short run though the monopolistically competitive firm could earn economic profits and you would draw it just like a monopoly earning economic profits with that average total cost below the demand where their profit maximizing quantity is that economic profit is going to cause firms to enter the market when that occurs each firm will have a smaller share of the market that will shift their demand curve and marginal revenue curve to the left and when that occurs their profit evaporates away and they are back at long run equilibrium here earning zero economic profit if on the other hand these firms are earning economic losses then firms are going to exit the market each remaining firm will have a larger number of customers we call that a greater share of the market size and that will shift the demand curve along with the marginal revenue curve to the right and when that happens The Firm will be earning in normal profit zero economic profit at the profit maximizing quantity now we're on to our Factor markets and the first thing we're going to look at is our perfectly competitive factor market and here we're going to focus on labor and when a firm hires labor in a perfectly competitive market they are going to pay the wage that is determined by the market because they are wage takers and the marginal cost is the cost of hiring one more worker and so that wage is going to go all the way across over to the firm's graph and that will become the marginal resource cost for the firm it is the cost of hiring one more worker for this firm and that marginal resource cost is the supply of labor for the firm we have the firm's marginal revenue product it's upward slopes a bit and then downward slopes I usually don't draw in that upward sloping portion you can if you want so how many workers should this firm hire well at low quantities the marginal revenue product is going to be greater than the marginal resource cost at higher quantities the marginal revenue product is less than the marginal resource cost the profit maximizing number of workers this firm should hire is where the marginal resource cost equals the marginal revenue product found right there at the intersection of those two curves if there's a change in the market wage here we have a rightward shift of the demand for labor that's going to cause the wage to increase within that market bring it on over to the firm graph and we're going to see a increase in the marginal resource cost for that firm and the firm will hire a lower quantity of workers as a result of the wage increase from the market of course you should notice that the last worker hired now has a higher marginal revenue product the next graph we're going to look at is a monopsony a monopsony is sort of like a monopoly except instead of there being only one seller there's only one buyer and since there's only one buyer this firm supply curve will be the market supply curve for labor it is upward sloping and since this firm must increase the wage as it hires more workers the marginal resource cost is going to be greater than the supply here the firm's marginal revenue product curve looks just like a normal marginal revenue product curve for a firm it's a downward sloping curve and that is the firm command curve for labor and just like with a perfectly competitive factor market the firm is going to hire where the marginal revenue product equals the marginal resource cost find that point right there and drop down that's the quantity this monopsony will hire now when it comes to the wage the supply curve shows people's willingness to work so the wage paid will not be up there at the intersection between the marginal resource cost and the marginal revenue product it's going to be below at the supply curve and we find it right there at WM comparing a monopsony to a perfectly competitive market we see our competitive market wage and quantity hired right there at WC and QC and when we turn this perfectly competitive market into a monopsony we see that the monopsony is going to hire fewer workers and pay a lower wage and as a result of not being allocatively efficient monopsonies have dead weight loss found in that triangle right there next we're going to talk about two different graphs these are negative externalities first we're going to draw a negative externality in production that means the producers of this product are producing spillover costs that fall on people who aren't producing or buying the product our demand curve here is our marginal private benefit as well as our marginal social benefit for this product the supply curve on the other hand is the marginal private cost of this product and since this product produces a external cost that falls on people who don't buy or sell the product we're going to add that external cost to the supply curve because the suppliers are the ones making that external cost that gives us a higher marginal social cost curve QE is our Market quantity but qo is the socially optimal quantity Where the marginal social benefit equals the marginal social cost at the market quantity the marginal social benefit is found at that point the marginal social cost is found at that point above and the socially optimal point where marginal social benefit equals marginal social cost is found right there there those three points create a triangle of deadweight loss if we wanted to graph a negative externality in consumption the demand curve would be the marginal private benefit and the supply curve would be the marginal social cost and marginal private cost here it's the consumers of this product that are creating the external cost so we're going to subtract the cost from the marginal profit benefit that gives us a new lower marginal social benefit curve and it's where that marginal social benefit equals marginal social cost that we find are allocatively efficient or socially optimal quantity at the market quantity we have that point of marginal social benefit we have the point above with our marginal social cost and the allocatively efficient point where marginal social cost equals marginal social benefit those three points give us a triangle of deadweight loss for a negative externality in consumption if we want to correct a negative externality with a per unit tax in this case a negative externality in production then we would have a per unit tax that is equal to that external cost it's the gap between the supply curve and the marginal social cost curve and if we Levy attacks that is the exact right amount it will shift that supply curve the vertical distance of that tax bringing the marginal social cost curve to be equal to the Supply Plus the tax curve and then the socially optimal quantity will be the amount of the quantity after the tax the consumers will pay that price up there labeled PT it's the price after the tax and the sellers will receive PS after the tax and if the tax is equal to the marginal external cost the dead weight loss will be eliminated next we're going to talk about positive externalities and first we'll talk about a positive actionality in consumption the supply curve is our marginal social cost and marginal private cost the demand curve is our marginal private benefit and since we are graphing an external benefit that is created by the consumers of this product we will add that benefit to the marginal private benefit curve to give us a marginal social benefit curve above the demand curve our socially optimal quantity is found where the marginal social benefit equals the marginal social cost at our Market quantity that point right there is our marginal social cost cost of the quantity up above we find a point where our marginal social benefit of that quantity is found and where marginal social benefit equals marginal social cost we find our allocatively efficient Point those three points give us a triangle of deadweight loss created by this positive externality in consumption if we want to graph a positive rationality in production the positive externality will be subtracted from the supply curves marginal private cost that will give us a much lower marginal social cost curve that's still upward sloping like a supply curve our socially optimal quantity will be found where the marginal social cost equals marginal social benefit but at the market quantity of QE there is our marginal social cost there is our marginal social benefit of that quantity and are allocatively efficient point where marginal social cost equals marginal social benefit is that point there and once again those three points give us a triangle of deadweight loss if we're going to correct for a positive externality in this case it's a positive externality in consumption the government can give a per unit subsidy for the product if that per unit subsidy is equal to the marginal external cost it will be the amount of the gap between the demand curve and the marginal social benefit curve and if the government gives that subsidy to the consumers of the product it will shift the demand curve to the right the vertical distance of that subsidy and then our socially optimal quantity will be the after subsidy quantity PC will be the amount that consumers pay for this product after deducting the subsidy and PS will be the amount sellers receive for this product of course the government could also give the suppliers this subsidy and then it would shift the supply curve to the right instead but either way if the subsidy is the amount of the marginal external benefit it will eliminate the deadweight loss now we're on to our last graph and it's the Lorenz curve now I've never seen anybody have to draw a Lorenz curve on the AP microeconomics exam but you might have to interpret it the Lorenz curve is a graph that shows the distribution of income within an economy the Lorenz curve shows the share of income households earn compared to the cumulative percentage of those households we have a 45 degree angle line that is called the line of equality on this graph and the actual Lorenz curve is the bowed out curve we see right there the closer the Lorenz curve is to that line of equality the more equal the distribution of income is within that Society the further that Lorenz curve is from that line of equality the more unequal the distribution of income is within that Society the genie coefficient is a mathematical formula that is based on the areas within the Lorenz curve it's a ratio of a divided by a plus b on that graph a genie coefficient of one is complete inequality one person owning all income a genie coefficient of 0 is complete equality all households earning an equal share taxes can impact that Lorenz curve a proportional tax will not shift it that's a tax that charges the same percentage of all incomes a progressive tax which charges higher percentages to higher income earners and lower percentages to lower income earners will shift that Lorenz curve inward a regressive tax on the other hand which charges higher percentages to the lower incomes and lower percentages to the higher incomes will shift that Lorenz curve outward meaning the economy has a less equal distribution of income whoa there you have it those are all the graphs that you are likely to see on your microeconomics exam now if you still need a little more help head down to review econ.com 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